Draft Construction Contracts

Introduction

This assignment is consists of an essay in response to the following question:

“Under English Law parties are free to draft construction contracts in whatever way they wish, and there are no controls over the terms to be included in them.”

Basically, different country has different law been set. In UK, English Law also known as common law and it does not require formality in the constitutional of a contract. Wikipedia (2009) define freedom of contract is the individuals freedom to draft contract which consider bound among themselves with their own contracts term, without intervene by government. Absolutely, the parties are entitle freedom of contract but there are limitation of liability which is free from injury, cause death, illegal trade, against public policy, against fairness, and minor.

Contracts might be in writing, partly orally or partly in writing. The problems are always arising regarding the contractual term among the parties deal. Nevertheless, the contract terms can be controlled by unfair bargain such as UCTA 1977. The construction contract is based on Law of Contract. Contract can be viewed as a method in which mean bargaining with one another can ensure that their pledge will last longer than their changeable states of mind.

The construction industry is notorious for claims but there are ways in which the risk of receiving one can be significantly reduced. Contracts allocate a balance of responsibility, risk and reward. The following chapter will discuss further the exclusion clause with landmark case cite by the law. Term implied in fact and law will carry out. Finally the relevant Act such as data management, safety requirement and others will be cited.

Exclusion Clause

An exemption clause is a term in a contract which either seeks to exclude liability for breach of contract and/or negligence (exclusion clauses) or seeks to limit liability (limitation clauses). There are some advantages in the use of exemption clauses:

• The allocation of risk in the contract
• Help to reduce litigation costs by making clear the responsibility which each party bears;
• Used in standard form contracts and thus enables mass production of contracts, help reduce costs of negotiation and of drafting contracts.

Despite these functions, exemption clauses have been exploited and abused by the parties with superior bargaining powers against their weaker counterparts; namely consumers thereby leave them with little or no remedy at all. As such, the courts generally frown upon the usage of exemption clauses and prefer to treat them restrictively. The first line of assault against exemption clauses is to find that the clause has not been incorporated into the contract.

A more powerful tool to strike down an exemption clause is by the courts construing the clause so that it does not cover the circumstances of the damage caused or the breach. Therefore the exemption clause will be properly interpreted and construed giving it a natural and ordinary meaning, and it falls thus to be decided whether the clause covers the damage caused. In some cases especially before the enactment of UCTA 1977, the courts have construed the clauses artificially to provide some form of protection for the weaker party.

However it is clear that after the enactment of UCTA 1977, there is no longer a need for the courts to adopt such a restrictive approach to both incorporation and construction. This is clearly stated by Lord Diplock in Photo Production v Securicor (1980):

The Securicor can’t exclude his liability regardless of fault or negligence.

Generally, parties to a contract can exclude liability. However, it must be reasonable and this fundamental breach of contract in George Mitchell v Finney Lock Seeds (1983) which the judge held that the seeds supplied were no sense vegetables seed and so it could be said that the consideration had totally failed. Basically, the commercial trade is containing risk and the reason being that limitation clauses. Thus, the other party would agree to a limitation rather than an exclusion clause.

Furthermore, the principles of “exclusive remedy” clauses may act whether can exclude claims brought outside the express terms of the contract. The remedy can exclusive by the risks are share among the contract party which cited in Strachan and Henshaw -v- Stein Industrie (UK) Ltd and GEC Alsthom Ltd(1997). The Court of Appeal held that it may have no common law remedy since “exclusive remedy” provision clearly stated that contractors fails to abide by the notification provisions under the express terms of the contract.

Nevertheless, the court/ law still allow for freedom of contract, but with a lot of constraint to the contracting parties. The various Standard forms of Contracts, for instance MF 1, NEC 3, FIDIC which the contracting parties have to follow on Governing Law or Applicable Law, They do have a freedom to contract, in term of cost but not to adjust the cost – Change in Law/ Regulation. The following are the clause should state in the contract which the contracting party cannot skipped it.

Clause 54.1 (Applicable Law) of Model Form of General Conditions of Contract, MF/1 (Rev. 4), states “ Unless otherwise stated in the Special Conditions, the Contract shall in all respect be governed by and interpreted in accordance with the laws of England and English law shall governed the procedure of any arbitration under Clause 52 (Dispute and arbitration)”.

Clause 1.4 (Law and Language) of Conditions of Contract for Construction (for Building and Engineering Works Design by the Employer), FIDIC (First Edition 1999), and states:

“The Contract shall be governed by the law of the country (or other jurisdiction) stated in the Appendix to Tender …”

Clause 1.12 (Applicable Law) of Standard Building Contract With Quantities, Rev 1, 2007 of The Joint Contracts Tribunal, states “This Contract shall be governed by and construed in accordance with the law of England.”

Implied Terms

A contract is either oral or in writing. The express terms of the contract do not in all circumstances constitute the whole contract. In many contracts although the primary obligations are contained in the express terms the parties do not express all the primary obligations nor do they provide for every eventuality. The courts use the device of the implied terms to fill the gaps in the parties’ contract. Terms may be implied by the following ways:

i) In fact and in law (by the courts)

ii) In law (custom) – by the courts

iii) In law (under statute) – by the courts

In Fact And In Law

a) The Business Efficacy Test

The power of the courts to imply a term in fact is to implement the parties presumed intention and give business efficacy to the contract was asserted and justified in “The Moorcock (1889) by Bowen LJ, “The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and to prevent such a failure of consideration as cannot have been within the contemplation of either side.”

In The Moorcock the defendants, in the defendants, in consideration of charges for landing and stowing the cargo, allowed the plaintiff, a shipowner, to discharge his vessel at their jetty. Both parties knew the vessel must ground at low water. However, the tide ebbed and she settled on a ridge of hard ground beneath the mud while she was unloading. The plaintiff sued for damages. The Court of Appeal implied an undertaking by the defendants that the river bottom was, so far as reasonable care could provide, in such condition as not to endanger the vessel.

B. “The Officious Bystander” Test.

1) Shirlaw V Southern Foundries (1939)

It was said that the term to be implied must be obvious and clearly be within the contemplation of the parties at the time the contract was made. As Mackinnon LJ said, “prima facie, that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. So that if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with the common “Oh, of course”.

2) Shell UK Ltd. v Lostock Garage Ltd. (1977) 1 All ER 481 (CA)

The above cases are examples wherein terms are implied in fact. What this phrase simply means is that the courts will only imply these terms if they feel that both parties would have considered such terms to be necessary pursuant to their contract. Treitel observes that the implication of this type of term is based on what the parties must have intended. Such a term in necessary to give business efficacy to the contract. This test was first formulated by Scrutton LJ in Reigate v Union Manufacturing (1918) 1 KB 592 at p 605:

Liverpool City Council v Irwin is an example of where the courts implied a term in law (common law). Treitel explains that such terms are implied into contracts of a particular type as a matter of policy rather than as a matter of what the parties intended. Such a term therefore must be reasonable to imply.

Terms Implied By Customs

It is a well established rule that a contact may be subject to terms that are sanction by customs, whether commercial or otherwise, although they had never been expressly mentioned by the parties.

Hutton v Warren [1835-42] All ER Rep 151

The Court of Exchequer held that, a lease made by the parties must be construed in the light of a local custom that a tenant who is bound to farm according to a certain course of husbandry is entitled to a fair allowance for seed and labour on the land upon quitting his tenancy. Note that customs are implied not to destroy the contract but to fulfil the law. Hence, it must not contradict the express terms of the contract.

Terms Implied By Statute

The twentieth century has seen great statutory intervention in the realm of contract law. To a large extent the abandonment of the freedom of contract principles has been the direct result of the development of the consumer movement in the United Kingdom.

Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994

(Hereinafter referred to as SOGA 79)

Firstly it is important to note that this statute only applies to a contract for the sale of goods which is defined in S 2 (1) of the above Act as one by which “the seller transfers or agrees to transfer property in the goods to the buyer for a money consideration called the price.”

Recent Cases:

1) Mariplex Mineral Handelgesselschaft GmbH v Louis Dreyfus et cie Mineral GmbH (1995) 1 Lloyd’s Rep 167 QBD (Clarke J).

Comment: Although this decision concerns the pre-Sale and Supply of Goods Act 1994, it is doubted that the decision would be different had it been decided under the new law. This is because the contaminated oil would be unsatisfactory quality as it would be “unfit for all the purposes of which (normal Russian gas oil) are commonly bought” – a stricter criteria under the amended S 14 (2B) (a) of the Sale of Goods Act 1979.

2) Saphena Computing Ltd. v Allied Collection Agencies Ltd (1995) FSR 616 CA (O’Connor, Dillon and Staughton LJJ).

Facts: A supplier of computers agreed to supply computer software to the agency. The point of dispute was whether there was a breach of an implied term as to the fitness for its purpose.

Held: The software was not entirely fit for its purpose and therefore there was such a breach of an implied term.

Comment: This is a pre-amendment decision. However it is submitted that the decision ought not be different if read in the light of the amendments brought about by the Sale and Supply of Goods Act 1994.

Control Over Contract Terms

Unfair Bargain

In some circumstances, UCTA provisions expressly restrict the ability of subcontractors or suppliers to limit or exclude the risk of payment term in a contract. In Davies v William Old SLJ (1969), “pay when paid” clauses in a way that is seemingly unfair to the sub-contractor. The inclusions of these clauses mention that the sub-contractor faced the risk of management contractor and employer insolvency while management contractor can protecting himself against the risk of non-payment from employer.

Public Policy

Under Section 24 of the Contracts Act 1950 it clarifies that control/limitation of drafting agreement. Agreement which involves or implies injury to the public or against the public good is forbidden by law and invalidated on the ground of public policy. In Malaysia, there is no legislation dealing with the protection of the consumer against exemption clauses. Opposing, the Parliament has seen it ‘proper’ to enact laws to protect certain authorities from liability. The view that public policy may not be expended is unwarranted, at least as far as it concerns the exemption clauses. The situation is worsening because of s62 of the Sale of Goods Act 1957.

in relation to the division of standard form contracts, Lord Diplock in Schroder Music Publishing Co Ltd v Nacaulay [1974] 3 All ER 616 at p 624:

The consequences of this provision are clearly understandable. All the implied conditions in a contract of sale provided by the Sale of Goods Act, for example, conditions as to quality or fitness, merchantability and undertaking as to title can be avoided by express agreement between parties.

Relevant Act

Under English Law, the contract can be control by relevant act. These have even stretched beyond injury, damage, infringement with intention to protect some minority group and inequality of bargaining power.

Procurement Processes

The founding EU treaty seeks elimination of national barriers to free trade in goods and services. Tendering qualification requirements and contracting terms specified by public bodies in Member States could distort this ‘open to all’ trading principle. Therefore EU Public procurement rules constrain such practices in UK achieved via the Public Contracts Regulations 2006 and the key requirements:

1. requirements on how the proposed contract is advertised, and tenders invited
2. controls on the extent of post-selection negotiation with the preferred bidder
3. limited selection criteria such as cheapest cost or ‘most economically advantageous having regard to [x, y, z stipulated criteria ]’
4. some latitude for pre-contest dialogue with suitable providers in order to devise solutions for novel projects

The EU Requirements only apply to public bodies and utilities. The contract may be void and potentially criminal penalties if fail to comply. It is therefore the need for procedural compliance / fairness but not just measured by the end result. Public Bodies Corrupt Practices Act 1889 is another public contracts are controls outlaw bribery.

Competition Act 1998 is against anti-competitive practices which disclose bid rigging and cover pricing. The Commission has imposed the largest ever fines for cartel infringement in operating the lifts and escalators cartels over €990 million. Otis, KONE, Schindler and ThyssenKrupp groups are rigged bids for procurement contracts, fixed prices and allocated projects to each other, shared markets and exchanged commercially important and confidential information between at least 1995 and 2004. Fines imposed and reductions granted by the Commission are shown in the Appendix.

Safety Requirements

Construction (Design & Management) Regulations 2007 is originally introduced 1994 which imposes safety duty for client, designed and main contractor. It requires that safety be adequately planned for and resources both within the contract documentation and actual performance of the works. However, a CDM co-ordinator must be appointed from the outset. It also requires a ‘Health & Safety File’ to be collated to record all of the documentation generated and steps taken. Otherwise, criminal penalties if fail to comply.

This can illustrate by a case on a building site in Cambridge. All three contractors were found liable and among them they paid more than £33,000 in fines and court costs. Besides, the companies therefore suffered from loss of production and not only compensation for the workman. The comments of the HSE Inspector sum up the needless loss in this case:

Data Management

Data management is the process of managing data as resources that is valuable for the business. However, those data could be protected by relevant act such as Data Protection Act 1998, Intellectual Property Rights and Freedom of Information Act 2000. All this act is protected the creator’s property from abused by others. They could disclose those parties malversation their rights in court proceedings.

Equality

Equality Act 2006 is set up intended for Equality & Human Rights Commission. Harassment based on sex, race, sexual, age, religion or disability is unlawful and harassment such as physical assault can be a criminal offence. This can be clearly shown in article of Black and white can unite vs. construction discrimination, it is illegal that employer to reject hiring the black labour and fair hiring should be undertaken in construction. However, the employer has to treat the black and white labour equality and employer might be criminal offence beneath the Race Discrimination Act 1976.

There is another unlawful case in a 50 years old woman who works experiences for the construction around 20 years. The company is hired another woman who younger than her and few more men after she work for 3 days in the company. She has faced victimised which the employer set off her with the reasons of people overloaded in the company. The employer could infringe against the Sex Discrimination Act 1975.

Implied Terms – Construction Materials

This act embraces contracts under which goods are particularly made. The SOGA 1979 implies terms on quality, ownership:

• s12 – implied that seller has right to sell the goods
• s13 – that goods will correspond with their description. This includes concordance with samples (subject to industry tolerances) – s15
• s14 – that the goods are of merchantable quality and fit for the use in purposes for which they are usually supplied

In Rotherham Metropolitan Borough Council v Frank Haslam Milan & Co Ltd (1996), the Court of Appeal held that the subcontractors were liable for the merchantable quality of materials which subject to clause s14 in SOGA. It is therefore term implied in the contract must be reasonable and fit for purpose.

Conclusion

Freedom of Contract still exists in Construction Contract, but subject to compliances to Act or Regulation such as SOGA, UCTA, CDMR, discrimination act, Competition Act 1998, and others.

As a general rule, party to a contract is free to incorporate whatever terms they like; however, they can not go beyond the law. Appendix is shown the SOGA for more details.

References

Benson, H. (2008). Black and white can unite vs. construction discrimination. [Online]. Last accessed 1 December 2009 at:

Black_and_white_can_unite_against_construction_discrimination.htm

Burnett, L. (2009). Lect Notes 3-Controllong Contract Terms. Sheffield Hallam University.

EDP HS&E Consultants Ltd (2007). The Construction (Design and Management) Regulations 2007. [Online]. Last accessed 30 November 2009 at: http://www.edp-uk.com/newsletters/cdmregulations2007.htm#LAW

Europa Press Releases (2007). Competition: Commission fines members of lifts and escalators cartels over €990 million, Brussels. [Online]. Last accessed 3 December 2009 at:

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/209&format=HTML&aged=0&language=EN&guiLanguage=en

Furmston, M.P. (1998). Report from the Courts. Journal of Construction Law, 9 (10), 355-357.

Lowson, G. and Robers, N. (1998). Pre-Contract Misrepresentations and the Exclusive Remedies Clause in MF/1. Journal of Construction Law, 9 (3), 97-100.

Nightingale, M. (1996). Pay When Paid Clauses-The Unfairness Continues. Journal of Construction Law, 6 (5), 185-188.

Vaqari, A. (2003). Contracting Out and Public Policy Ground Under S 24(E) of The Contract Act 1950. The Malayan Law Journal Articles, Vol 2, 5-9. [Online]. Last accessed 5 December 2009 at: http://www.scribd.com/doc/14783057/The-Malayan-Law-Journal-Articles-Contract-Acts

Bibliography

Atkinson, D. (1999) Implied Term, Atkinson Law.

Wallace, D. (1995). Hudson’s Building and Engineering Contract. London, Sweet & Maxwell Limited.p93-150

Smith, V. P. (1987). A Building Contract Casebook, Second Edition. Oxford, Ingramlight Properties Ltd and Michael Furmston.

Treitel, G. H. and Peel, E. (2007). Treitel on the Law of Contract. 12th ed., Sweet and Maxwell.

Breakingnews.ie (2007). Lift manufacturers fined €992m for price fixing. [Online]. Last accessed 5 December 2009 at: http://www.breakingnews.ie/archives/2007/0221/business/cwsnsnaucwey/

Mehta, K. (2008). Principles of European Commission Cartel Regulation. [Online]. Last accessed 5 December 2009 at: http://documents.eu-japan.eu/seminars/japan/industrial/presentation_mehta1_april08.pdf

Major, W.T. (1990), Casebook on Contract Law, London, Pitman.

Wikipedia (2009). Freedom of Contract. Mediawiki. [Oline]. Last accessed 22 Novemebr 2009 at: http://en.wikipedia.org/wiki/Freedom_of_contract

Wikipedia (2009), Contractual term. [Online]. Last accessed 5 December 2009 at: http://en.wikipedia.org/wiki/Implied_term

Yates, D. (1082). Exclusion Clauses in Contract. 2ed., London, Sweet & Maxwell.

Fines imposed and reductions granted by the Commission:

Source: Brussels, 2007

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/209&format=HTML&aged=0&language=EN&guiLanguage=en

S 12 (1) SOGA 79: implies a term that the seller has a right to sell the goods.

S12 (5 A) SOGA ‘79: The term implied has the status of a CONDITION.

The right to sell does not necessarily connote ownership. Rather, what it means is that the seller cannot be legally prevented from selling the goods in question. In Niblet v Confectioners Materials the seller was held not to have had a right to sell since in pursuance of the purported sale he had actually infringed certain trademark regulations in the choice of the labels that he had used.

S 13 SOGA ‘79

Implies a term that in a sale by description the goods supplied must correspond to the description.

S 13 (1A) SOGA ‘79

This term has the status of a CONDITION

S 13 (2) SOGA ‘79

If the sale is by sample as well as by description, it is not sufficient that the bulk corresponds with the sample if the goods do not also correspond with the description.

S 13 (3) SOGA ‘79

A sale of goods is not prevented from being a sale by description by reason only that, being exposed for sale or hire, they are selected by the buyer.

The language used in S 13 (3) makes it clear that a sale by description is not limited to case where the purchaser has not seen the goods and as such is merely relying on the description per se. A sale by description can occur in a circumstance where the buyer has seen the goods and hence this section does encompass over the counter sales as well.

A thing is sold by description so long as it is not sold merely as a specific thing but as a thing corresponding to a description. Lord Wright in Grant v Australian Knitting Mills (1936).

The key to applying S 13 lies in determining whether the description of the goods or the specifications as such were important in identifying the subject matter of the contract-

Ashington Piggeries v Christopher Hill Ltd (1972)

S 14 (1) SOGA ‘79

Except as provided by this section and section 15 below and subject to any enactment, there is no implied (condition or warranty) (term) about the quality or fitness for any particular purpose of goods supplied under a contract of sale.

S 14 (2) SOGA’ 79

Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

S 14 (2A) SOGA ‘79

For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking into account any description of the goods, the price (if relevant) and all other relevant circumstances.

S 14 (2B) SOGA ‘79

The quality of the goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of the goods: –

a) Fitness for all the purposes for which goods of the kind in question are commonly supplied,

b) Appearance and finish

c) Freedom from minor defects,

d) Safety and

e) Durability

S 14 (2C) SOGA ‘79

The term implied by subsection 2 above does not extend to any matter making the quality of the goods unsatisfactory –

1. which is specifically drawn to the buyer ‘s attention before the contract is made,
2. where the buyer examines the goods before the contract is made , which that examination ought to reveal, or
3. In the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.

S 14 (3) SOGA ‘79

Where the seller sells goods in the course of a business and the buyer expressly or by implication makes known –

a) To the seller or,

b) Where the purchase price of part of it is payable by instalments and the goods were previously sold by a credit-broker to the seller, to that credit broker, any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely , on the skill or judgement of the seller or credit-broker.

Slater And Others V Finning Ltd. (1996) 3 All ER 398 HL Lords Keith Of Kinkel, Griffiths, Jauncey Of Tullichettle, Slynn Of Hadley And Lord Steyn.

Facts: The appellants, who owned a motor fishing vessel, engaged the respondents to repair the vessel’s engine when the main bearing failed. While carrying out the repairs, the respondents installed a new type of camshaft which the manufacturers claimed would be less subject to wear and compatible with other fishing vessels having the same type of engine. However the new camshaft failed at sea when installed in the appellant’s vessel. The two further camshafts installed also failed. These failures disrupted the appellants fishing operations causing them loss, expense and delay. The appellants then sold the problematic engine to another who used it without encountering any problems. The replacement engine did not cause any trouble. The appellants brought an action claiming damages for breach of the implied condition as to reasonable fitness for purpose under S 14(3) of SOGA 1979. The claim was dismissed (The Lord Ordinary-Weir) because the failure of the camshaft was due to the idiosyncrasy- excessive torsional resonance – which causes excessive wear on the camshaft. The decision was upheld by the court in session-The Lord Justice Clerk- Ross, Lord Clyde and Lord Morrison. The appellants appealed to the House of Lords.

Held: Where a buyer purchases goods from a seller, there was no breach of the implied condition of fitness of purpose where the failure of the goods to meet the intended purpose arose out of a idiosyncrasy or abnormality which was not made known to the seller. The fact that the buyer was himself ignorant of the idiosyncrasy is irrelevant. Since the respondents did not have knowledge of the idiosyncrasy in the shape of the appellants’ vessel’s abnormal tendency to produce excessive torsional resonance in the camshafts, resulting in them becoming badly worn out within a short span of time, the respondents were not thus liable.

Comment: This decision marks the similarity between English Law as to fitness of purpose and the Scottish position in affirming the decision of Griffiths v Peter Conway. It also shows that the law as to fitness for a particular purpose in S 14 (3) SOGA ‘79 remains unaffected by the amendments brought about by the Sale and Supply of Goods Act 1994.

S 14 (4) SOGA ‘79

An implied (term) about quality or fitness for a particular purpose may be annexed to a contract of sale by usage.

S. 14(6): As regards England and Wales and Northern Ireland, the terms implied by subsections (2) and (3) above are conditions.

S 15, Sale by Sample

S 15 (1) SOGA ‘79

A contract of sale is a contract for sale by sample where there is an express or implied term to that effect in the contract.

S 15 (2) SOGA ‘79

In the case of a contract for sale by sample there is an implied (term) (a) that the bulk will correspond with the sample in quality;

(c) That the goods will be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample.

S 15(3): As regards England and Wales and Northern Ireland, the term implied by subsection (2) is a condition.

S.15A SOGA ‘79: Modification of remedies for breach of condition in non-consumer cases.

S 15 (1) Where in the case of a contract for sale

(a) A buyer would, apart from this subsection, have the right to reject goods, by reason of a breach on the part of the seller of a term implied by Section 13, 14 or 15 above but,

(b) The breach is so slight that it would be unreasonable for them to reject them, then, if the buyer does not deal as consumer, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty.

(2) This section applies unless a contrary intention appears in, or is to be implied from, the contract.

(3) It is for the seller to show that that the breach fell within subsection 1 (b) above.

(4) This section does not apply to Scotland.